Equity Crowdfunding, known as ECF in short, has been making the headlines in the world of fintech lately. Particularly in this era of a global pandemic, businesses are struggling to make ends meet, and alternative ways of financing look more promising than ever. But is ECF truly the golden goose’s egg to end the farmer’s misery? Or is it merely a fad that will erode away in time?
In this blog, we explore ECF, its perils, and its rewards. Dig in to see if this bandwagon is truly worth jumping onto.
Is ECF a weird Market?
“The market is weird. Every time someone sells, another buys, and they both think they’re smart.”
Giving and taking are part of the process when it comes to dealing with money. People with money will give it away for several reasons. It could solely be to help the needy, or in a bigger picture, simply to earn more. Investment happens when you do the latter. One thing to keep in mind – “things that lose value over time from you owning them are not considered assets.” Something you buy online for your daily usage is not considered an investment, it is rather consumption because these things lose value.
So, is the market really weird though? While it is true that the market has these functions, all parties involved are seeking one common interest, and that is individual gain. With this comes trading wisely, or also known as smart investment.
Investment is constantly evolving. Crowdfunding has started a whole new demographic of investors and has changed the old way of investing. It has opened a lot more opportunities for anyone who is interested in starting a new business. Developers and entrepreneurs who have failed before in finding the right platform will gain back the chance to start over. These businesses did not receive funds because they were not recognized and prioritized by the banks. Crowdfunding would open doors of second chances to those who need them.
Over and above that, the market is ever growing and is becoming more popular. The World Bank projects crowdfunding volume worldwide to hit US$1trillion in 2025. Crowdfunding also brings together investors that possess the same vision. This platform offers investors from all over the world a shot to invest in numerous projects and businesses even outside of their country of residence. Ethis deals with investors from over 60 countries who have invested in our projects in Jakarta and Dubai. Therefore, geographical barrier is not at all an issue when it comes to crowdfunding since it is all executed online.
Regardless of what the benefits are, we tend to invest in something that we believe in. People who are wealthier might choose differently when it comes to spending money since their basic necessities are already well taken care of. They will make different choices by spending their money on something that would increase their worth. Spending money on things such as gold, real estate, sukuk (bonds) and the stock market are considered investments because they have the potential to increase in value or provide income. Yet not many have the financial capability to invest in such opportunities.
When it comes to providing funds, I think we all have the same thing in mind – a channel that we can trust. We naturally want to give our hard-earned money on a use that would be beneficial to us, no matter in what form it comes. Be it purchasing, fundraising or charity – all these are some sort of investments we make that will give us rewards, one way or another.
To every action we take, there is a result. In every investment we make, with the potential rewards and opportunities that come with it, comes also the risks. There are always two sides that need to be considered. Following are some of the risks and rewards involved for your consideration.
ECF: Risks To Be Considered
1) A higher risk of failing
When investing in equity crowdfunding, there is no doubt that the risk is high. But again, what is investment without taking risks? The bigger the risk, the bigger the reward that comes out of it. Because there is no guarantee that a company or a business might succeed, there is a higher chance that investors might not receive returns. The business might undergo a failure which will result in losses for investors. The key is to spread the risk through diversification and understanding what you are getting into before jumping in to invest.
2) Getting hoaxed
With technology today, crowdfunding is carried out online. While it opens a lot of doors for people to do good and venture into new opportunities, there will be unethical people who try to take advantage. With the easy access that comes with it, these impostors would scam gullible investors to invest in some fake schemes and flee with all the money. For this reason, the range of services provided by Fully-Verified significantly affects secure business. One basic principle to remember is, if it’s too good to be true, it probably is. Legendary investor Warren Buffett’s company gains about 20% a year, while top yielding property rarely goes beyond 10% in most countries.
3) Unclear Timeline
When we talk about higher risk, this is one of the most important points. Return on the equity funds make take time to be realized. Depending on the business plan and any profits that come out of it, the initial objective of getting returns might not happen until the business itself succeeds.
ECF: Rewards To Be Granted
1) Potential for enormous profits
As mentioned earlier – the bigger the risk, the bigger the potential reward. By investing in equity crowdfunding, investors have the potential to make oversized profits. Investors can gain a large windfall when a business succeeds. A prominent example is Peter Thiel, Facebook’s first investor. Thiel invested $500k in Facebook in its early days, and that investment had granted him more than $1B – a 2000x returns.
2) Personal Fulfillment
Investors select the cause or project that they are interested in. Some investors might prefer to pick out a project that is building a cancer clinic because the objective is closer to their hearts. Consequently, when investors have the option to handpick the project to put their money in, it can give them personal satisfaction knowing they are doing it for a reason they believe in.
3) Bigger business opportunities
Crowdfunding encourages more business opportunities and job creation. It creates opportunities and jobs for people by supporting promising young and new ventures, from micro-enterprises to startups.
There needs to be a thorough understanding about the key risks when investing in crowdfunding. Here in Ethis, we screen and analyse the risks of a project, so you can then review the project information and make your own informed decision. We work closely with the project owners and issuers to mitigate the risks as much as possible for investors.
Like our Founder, Umar Munshi said, “you should only invest the amount that you can afford to lose.”
Equity is perhaps one of the riskiest types of investments, as you are taking direct participation in the outcome of a project or company. You do not know if you are going to be safe in the water (swimming skills are needed here). You are essentially taking part in a journey, in many different business journeys, and getting your payout if and when the business reaches the pot of gold.
As the famous quote by the late Muhammad Ali goes, “He who is not courageous enough to take risks will accomplish nothing in life.” The decision after all, is in your hands.